Salary vs. Hourly Pay: What's the Difference?

Most jobs in the United States are governed by the Fair Labor Standards Act (FLSA) and are categorized as either exempt or nonexempt. If you are nonexempt, you are owed overtime wages, which are 50% greater than your regular pay rate, for any hours beyond 40 worked during a single week. Exempt employees do not receive overtime pay.

Salary vs. Hourly Pay: An Overview

What makes you exempt? In general, an employee has to make at least $455 per week ($23,660 per year), be paid on a salary basis, and perform exempt duties that require discretion and independent judgment at least 50% of the time. If you take on managerial duties, for example, you’re probably exempt. This means you can be paid a salary, so no matter how many hours you work, your employer doesn’t have to pay you overtime wages. 

Because of the FLSA, you can't negotiate whether a job is exempt or nonexempt. Regardless of job title, it's the duties you perform that determine your job category. 

IMPORTANT: A salary comes with an inherent sense of security. Employers can cut nonexempt hours easily, but renegotiating a salary is more complicated.

Salary

Each time your paycheck arrives, it’s the same. An annual wage is a term of your employment, and that’s how much you will receive for as long as you hold the same job or until the terms are renegotiated. It is a type of implicit cost.

A salary comes with an inherent sense of security. Employers can cut nonexempt hours easily, but renegotiating a salary is more complicated.

There can be a downside, though. While salaried employees receive a fixed rate of pay, they also have specific responsibilities and tasks that must be met or completed—even if that means longer hours and occasional weekends. In some circumstances, this can make it more difficult to separate work and personal time.

Hourly Pay

As an hourly employee, you are paid for all of the hours you work. If an employer wants more of your time, they have to pay you more. Legal overtime is time and a half; some employers may pay double time for holidays, but that isn't mandatory unless it's part of a contract that covers your job. If you're in a well-compensated field with lots of overtime, you could bring home more than if you earned the same official pay on a salaried basis.

There's also a lifestyle aspect. In general, hourly employees will find it easier to separate home and work. Once work is over for the day, they can concentrate on family, hobbies, or a second job.

KEY TAKEAWAYS

• Salaried employees received a fixed wage, but they must keep up with their responsibilities and complete necessary tasks—even if that means working extra hours.

• Hourly employees must be paid time and a half for any hours beyond 40 worked during a week.

• In the U.S., the Fair Labor Standards Act determines whether or not employees can be paid a salary or must be paid hourly.

Unfortunately, being paid hourly also makes you more vulnerable. When laws change or the company goes through tough times, hourly employees often feel the impact first. It’s easier for an employer to knock off some of your hours until business improves than to eliminate an entire salaried position.

There also are possible effects on eligibility for health care coverage. Businesses with 50 or more employees are required to provide health care to people working 30 or more hours, so some businesses keep hourly employees to fewer than 30 hours to avoid the mandate.

The Bottom Line

There are pros and cons to being hourly versus a salaried employee but for the most part, the latter enjoy more benefits, such as paid leave and other employer-sponsored benefits. Hourly workers do not usually receive compensation in the form of paid leave by the companies who hire them and are responsible for their own healthcare. Hourly employees enjoy more autonomy and may be able to set their own hours.